Northern Nat'l Bank v. Commissioner ( 1929 )

NORTHERN NATIONAL BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Northern Nat'l Bank v. Commissioner

Docket No. 16691.

United States Board of Tax Appeals

16 B.T.A. 608; 1929 BTA LEXIS 2550;

May 21, 1929, Promulgated

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F. W. McReynolds, Esq., for the petitioner.

Harold Allen, Esq., and W. R. Lansford, Esq., for the respondent.

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SIEFKIN

This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1918 of $1,633.26. Two errors are alleged; the disallowance by the respondent of a deduction of $6,762.74 as a bad debt and his addition to income of the petitioner of $9,941.88.

FINDINGS OF FACT.

The petitioner is a national bank with its principal office and place of business in Philadelphia, Pa. On December 31, 1918, the petitioner held a note of one E. L. Hill for the amount of $8,600, made and delivered on November 5, 1915, as a consolidation and renewal of the balance due on two previous notes of said E. L. Hill. The note of $8,600 matured by its terms on November 24, 1915, and was not paid at maturity. After its maturity the note was not renewed, but was held by the Northern National Bank and is still in said bank's possession. Since November 5, 1915, the date of the making and delivery of the $8,600 note, the obligation thereof has been reduced by payments in the following amounts:

Date of payment	Amount
Dec. 29, 1915	$75.00
Jan. 27, 1916	50.00
Feb. 29, 1916	100.00
Apr. 3, 1916	75.00
July 18, 1916	50.00
Aug. 17, 1916	75.00
Sept. 28, 1916	50.00
Oct. 30, 1916	60.00
Dec. 1, 1916	$75.00
Dec. 18, 1916	100.00
Feb. 15, 1917	336.65
Mar. 14, 1917	165.61
June 20, 1917	100.00
Aug. 17, 1917	50.00
Sept. 25, 1917	50.00
Oct. 25, 1917	50.00
Nov. 26, 1917	$75.00
Dec. 27, 1917	50.00
Jan. 24, 1918	50.00
Feb. 25, 1918	50.00
Mar. 26, 1918	50.00
Apr. 26, 1918	50.00

In addition to the above payments the account was also credited November 24, 1915, with $50, same being a correction of error in overstating face of note.

On November 5, 1915, E. L. Hill had in force a certain $10,000 10-year renewable term policy on his life, which he assigned to the Northern National Bank as part of the collateral security for the note of November 5, 1915. The policy had no surrender value, cash value, extended insurance or paid-up insurance value. In 1918 the petitioner, by authority of the Federal National Bank Examiner, charged off the unpaid balance of the E. L. Hill account in the amount of $6,762.74. The Northern National Bank paid the premiums on the life insurance policy from 1918 to 1922, when E. L. Hill died, whereupon the policy was paid to the Northern National Bank in the sum of $10,000. None of these premiums were allowed as deductions in the petitioner's income-tax adjustments.

On its return for 1917 the petitioner returned income of $9,941.88 as interest accrued, and paid income tax thereon. This interest was not actually paid until 1918. The petitioner kept its books on a cash receipts and disbursements basis. The respondent allocated the said $9,941.88 as income for 1918. No refund or credit has been given the said bank for the amount of the tax paid on said $9,941.88 for 1917, on the ground that such refund was prohibited by statutory limitation.

Edward L. Hill, who signed the note of $8,600 referred to above, disappeared from Philadelphia sometime soon after April, 1918, leaving no known address. Between April and June the petitioner's accounts were examined by a national bank examiner, who, when the situation as to the Hill note was explained to him, made no objection to the petitioner carrying the note as an asset from June 30 to December 30, 1918, in the hope that news could be had of Hill. In the fall of 1918 the petitioner had another examination and, no word having been had of Hill, the examiner directed that the debt be charged off at the end of the petitioner's fiscal year ending December 31, 1918. This was done. After April 18, 1918, the petitioner received no payments from Hill and was unable to learn his whereabouts during the remainder of that year. The petitioner deducted $6,762.74 as a bad debt in 1918 and the respondent disallowed such deduction in arriving at the deficiency asserted in this proceeding. The debt was ascertained to be worthless and charged off during the year 1918.

OPINION.

SIEFKIN: It is clear to us that, as to the deduction for the bad debt, the respondent's action was erroneous. From the facts before us, there is ample to hold that the debt was ascertained to be worthless and charged off in 1918, and that the deduction should be allowed. The fact that the petitioner held an insurance policy upon the life of the debtor does not change our conclusion, since such policy was a term policy without cash surrender, extension, or paid-up insurance value. In a number of cases we have reduced the amount of the debt by the cash value of the policy retained by the creditor (see ; ; and ), but here there is no such cash value and all of the facts are present to show worthlessness of the debt otherwise.

As to the second issue, it is equally clear that the respondent properly added $9,941.88 to the petitioner's reported income for 1918. The petitioner argues that in 1917 it was on an accrual basis of accounting and properly reported, under such basis, interest accrued but not paid in the above amount and that, beginning in 1918, it changed to the cash receipts and disbursements basis. There is no foundation in the record for such statements of fact. So far as we can tell from the record, the petitioner erroneously included such amount as income in 1917, which is no justification for an omission from income in 1918, when it was paid. On this point the action of the respondent is approved.

Reviewed by the Board.

Judgment will be entered under Rule 50